In a poorly-reasoned and somewhat murky decision, a Superior Court judge in Daley v. Sudders (Civil Action No. 15–CV–0188–D.Dec. 24, 2015) extends the Doherty decision to reject the MassHealth application of a man who, with his wife, placed his Worcester condominium into an irrevocable trust for long-term care planning purposes.
In December 2007, Mr. and Mrs. Daley transferred their condominium into an irrevocable trust, naming their son and daughter as trustees. The deed retained a life estate for Mr. and Mrs. Daley, permitting them to live in the condominium, which they did for six years, when Mr. Daley had to move to a nursing home in December 2013. His application for MassHealth benefits was subsequently denied because the trust was considered countable, putting him over the asset limit for eligibility.
Decision Based on Doherty
On appeal, the Court upholds MassHealth's denial, stating that it must give deference to MassHealth's interpretation of its own laws and regulations. It cites the decision in Doherty v. Dir. of the Office of Medicaid (74 Mass.App.Ct. 439, 441, 908 N.E.2d 390, 2009) to the effect that: "If a Medicaid applicant can use and occupy her home as a life tenant, then her home is 'available.'" While this is a misunderstanding of the Doherty decision, the court then makes the leap that would seem to invalidate all life estate deeds, which MassHealth has never, in fact, challenged to date:
This court concludes that Mr. and Mrs. Daley's condominium was available to them because they retained life estates under the deed, and continued to use and live in it after establishing the Trust.
In other words, the Court here takes a provision in the deed retaining property rights for Mr. and Mrs. Daley to invalidate a trust, which apparently does not give them the right to use and occupy the condominium. This is unlike the Doherty trust, in which the right to use and occupy the property was in the trust, rather than the deed.
Right of Substitution
Then the Court reviews certain provisions in the trust which permit the trustees to use income and principal to pay certain trust expenses—taxes, insurance premiums—and a right of substitution to conclude that "the Daleys had access to both the Trust principal and income." The right of substitution is included in many trusts holding real estate for tax purposes. It permits the trust grantors to exchange property of equal value to the trust property—in effect, to buy it out. This is no different from trustees selling trust property on the open market, except that it gives the grantors the right to demand that this happen. In most cases where these trusts own real estate, the right is totally theoretical since the grantors do not have sufficient other assets to make the exchange.
The Court then rejects explicit language in the trust stating that “[t]he Trustee shall have no authority or discretion to distribute principal of the Trust to or for the benefit of either Donor," citing the Doherty decision that this restriction may not be read in isolation from the other provisions of the trust. But in citing Doherty, the Court actually explains why it should be distinguished from the Daley trust:
This case is analogous to Doherty, where the Appeals Court concluded the trust's principal was a countable asset because the trust, despite some language restricting the grantor's access to the principal, allowed the trustees to invade the trust's principal and income when necessary to ensure the grantor's “quality of life,” “comfort,” and “respond to her changing life needs.”
The Daley trust apparently has no language permitting access to principal to ensure the Daleys' "quality of life," "comfort," or "changing needs." The trust in Doherty had a number of flaws that made it vulnerable to attack by MassHealth. In its decision, the Appeals Court cited a number of features of the trust, but the crux of the matter was language that this Court cites providing for use of principal for the grantor's benefit. As best as we can see from this decision, the Daley trust does not suffer from the same defect and the condominium should not be considered to be a countable asset.
Attack on Life Estates
The Court's apparent rejection of the life estate as well as the trust is quite troubling on at least two grounds. First, it may give incentive to MassHealth to attack life estates, which as I mentioned above, it has never faulted in the past. Second, it's not clear here what the Court and MassHealth consider countable. If it's the assets in the trust, then that's just part of the value of the condominium since the trust only holds the remainder interest in the condominium, and Mr. and Mrs. Daley continue to hold the life interest. Only the value of that remainder interest based on Mr. and Mrs. Daley's joint life interest—which can be calculated from actuarial tables—should be counted.
The litigants in the case have a tough choice to make as to whether to appeal it to the Appeals Court. Such an appeal may correct a bad decision or confirm it. I'd be inclined to make the appeal given the clear errors of law in this decision.
This decision was subsequently reversed by the Supreme Judicial Court in Daley v. Sec. of the Executive Office of Health and Human Services, 477 Mass 188, May 30, 2017. We guess Attorney Margolis was correct in his assessment that the decision was "poorly reasoned." You can read about the SJC decision on this case and it's companion, Nadeau v. Director of the Office of Medicaid, here.